Motley Fool Hidden Gems Investing - As Luck Would Have It

Episode Date: March 17, 2024

In investing, you’re always searching for a pot of gold. But sometimes, “luck” has other plans. Nick Sciple, Jim Gillies, and Emily Flippen got together on an episode of our members-only livestream for a conversation about the role of luck in investing. In this selection from that conversation, they discuss: Being early to trends, and lucky to sell  The importance of journaling Time horizons, and what it means for stocks to be “up for sale every day.”  To learn more about Stock Advisor, our flagship investing service, visit: www.fool.com/emily Host: Nick Sciple Guests: Jim Gillies, Emily Flippen Producer: Mac Greer Engineers: Rick Engdahl Companies discussed: BCE, RY, NFLX, GPRO, AMZN Learn more about your ad choices. Visit megaphone.fm/adchoices

I don't like the word luck. I think the word I prefer to use is randomness because luck implies a certain positive connotation, right? And you can have randomness to the upside and the downside. So there's always in life and investing, there's always going to be an element of randomness. Now, how big of a level that randomness has on the outcome, I think probably depends on, you know, different businesses, different time periods, whatnot. But what I do is I try to, to Jim's earlier point, separate what is randomness versus what is process, because you cannot control randomness. You can't do it. I'm Mary Long, and that's Emily Flippen, a lead advisor here at The Motley Fool.

This St. Patrick's Day, we're playing a part of a conversation from our members-only livestream, Motley Fool Live. In this segment, Emily is joined by fellow Fool analyst Jim Gillies and Nick Seifel for a conversation about the role of luck in investing. They also discuss how journaling can act as a hedge, intertwining luck with skill, and a built-in inoculation against risk. What is the role of luck in investing? This is hard to separate sometimes in the short term, how a company has performed its business performance relative to how the market has

has driven a company I think a longer term maybe luck plays less of a role but but Jim pro shop guy's question is addressed to you I'll let you go first how do you think about the role of luck in investing and do you have some stories of being lucky and unlucky to maybe share with the class to help us learn I think the concept of luck it is important but I think the more important thing is to recognize perhaps when you have gotten lucky because we're all going to have moments of great luck and frankly the opposite i was an early investor in a company that's long gone called genesis microchip that was basically would make video chips for flat screen displays this is back in the days when most displays were were cathode ray 2

monitors yes i'm that old that you know i was very early on on that and i made good money on precisely half of the shares because I sold them near the top. But then the company got misstep, management missteps, and better-heeled competitors, and the rest of it effectively went to zero. But I'll give you one, and again, I did well in this one, but I don't want that to be the focus because I want you to recognize the role of luck there, which is kind of where I'm going. So the largest company in Canadian history, market cap Canadian history,

is a company called Nortel Networks. And for comparison, in the year 2000, Nortel Networks was a $380 billion company. The largest company by market cap in Canada today is the Royal Bank of Canada, which is at about $170 or $180 billion. So a quarter century later, after the peak of Nortel Networks, we are still at half the size of the largest market cap ever reached. Less than half, actually. and nortel networks ultimately went to zero 380 billion dollar market cap at the top goes to zero over i think it was it topped out in 2000 it was it was near a zero in 2002 kind of sputtered back to life and then ultimately to zero in 2008 or 2009 so pity the index investors

in Canada first. Okay. One third of your money was in Nortel and it went to zero, but I sold Nortel. I own shares of Nortel. I sold shares of Nortel on the day it hit its all time high in July of 2000. And I missed the all time high by 25 cents a share split a job that that was that and that well me selling it was lucky 100% lucky because I was buying a house and I went down my list of stocks that I owned at the time so we could scratch up a down payment and I'm like okay that could go that can go that can go that could go if I buy a house a year later my Nortel shares are worth 10% of what they were worth at the peak on the day I sold I mean like that's a fact so incredibly lucky there how did i get my nortel shares the answer is i didn't go out and

buy them at the time nortel was 40 owned by a company called bce bell canada enterprises our version of at&t maple flavored at&t so you can think big bloated phone company telecommunications company you know boy they better pay a dividend because you're not going to make much on they owned 40% of Nortel. And I've noticed about two years before I sold my Nortel, I've noticed that if you backed out the value of Nortel from BCE, again, our version of AT&T, if you back out 40% of the value of Nortel from the market cap of BCE at the time, you were effectively buying BCE for $2 a share. Now, I own BCE to this day. It has struggled for years, but it pays like a 7.5% dividend and it's fine. But it was like, again, buying BCE for $2 a share because you got the

Nortel shares as well. That was not lucky. That was deliberate. And so the more experience you have, it's deliberate because I can recognize the value. And then BCE spun out the Nortel shares to shareholders, which is how I got mine and then of course sold them. But so luck and skill to my mind are intertwined you know what's what is it thomas edison or henry ford or mark twain who who was it who said the harder i worked the luckier i became that sounds like henry ford but i don't but i i don't yeah someone on that yeah someone will know will know better than i as much as i'm gonna hear matt damon's voice in my head saying this but fortune favors the brave. Fortune, I hear, is luck, right? I hear fortune as luck.

And, you know, there's a certain, you know, scared money don't make no money, which I hate that saying in there, but there's a certain amount of that in there. But like a lot of money you make from lucky circumstance spends the same as money you make investing in Berkshire Hathaway or anyone else. And I want to throw it back out because, you know, everyone, including me, are tired of listening to me at this point i think we all have luck in almost every investment we make but you can't count on it so i almost exclude like maybe i'll get lucky but how can i tilt the odds in my favor so i don't need to get lucky does that make any sense yeah i think you kind of have to put yourself in a position to to be fortunate um i think in the short term it's very

you're probably going to have more things attributed to luck than you're going to see over the long term so it's like it's more likely to have a lucky year than it is to have a lucky 20 years right yes uh in in your portfolio you'd have the same way but you're much more likely to have a lucky or unlucky thing happen to an individual stock than it is to have a portfolio of 25 stocks which i think gets into some of the things that we talk about investing at that at the motley fool right if you if you have a portfolio that has one stock and you get and you're fortunate then you could do quite well. However, if you're unfortunate, you could lose all of it. Jim talked to you about the Nortel Networks thing. I'm sure folks felt it on both sides of that. However,

with a portfolio of 25 stocks, particularly if you're trying to fish in the bucket of high quality, rule-breaking, special companies, you're going to have some of them that don't pan out. For every Netflix, you're going to have a GoPro or what have you. However, part of the approach of investing that David Gardner has talked about is you have this broad portfolio of all these companies with the potential to get you super lucky to the upside, to be your Amazon or your Netflix or your what have you, then that's part of your approach. So I think you can adopt an investing strategy that allows you to benefit from luck and also allows you to, when you get unlucky in the short term, when something bad happens with the CEO, he gets involved with a

scandal. Jim and I might know something about a company that has that going on from time to time, which is TKO Company. You can kind of weather that storm in your portfolio. So, I think the approach that you take in how you invest both in how you assemble your portfolio, the individual companies in your portfolio, the players on your team, if you have you, and the duration that you think about playing the game gives you more opportunities to benefit from luck into weather, kind of bad luck. And I think anybody in a long investing career is going to have both of those things

and being able to handle that and respond to it well is part of having success over the long-term. Emily, thoughts on luck in your own investing career? I'll try to be quick because I think y'all have done a great job of, I mean, I agree with everything you've said. The only thing I would add is I don't like the word luck. I think the word I prefer to use is randomness

because luck implies a certain positive connotation, right? And you can have randomness to the upside and the downside. So there's always in life and investing, there's always going to be an element of randomness. Now, how big of a level that randomness has on the outcome, I think probably depends on, you know, different businesses, different time periods, whatnot. But what I do is I try to, to Jim's earlier point, separate what is randomness versus what is process, because you cannot control randomness. You can't do it.

It's out of your control. So good luck trying to make sense of it, because if you spend your life, you know, spinning your wheels over aspects that are just never going to have sway over the choices that you make, then, you know, you're just wasting your time. So try to figure out what you can and can't control. And what you can control is the process for which you make decisions. And so what I do is it goes back to just keeping an investing journal, write down why you like a company, write down the risks associated with it, what you're thinking about the valuation, what you think is going to happen in the future, what you think about management,

And then craft a narrative about why you may like or dislike this company, what you expect to happen, and then take the process and go through, okay, if this doesn't happen, what caused it? What could have gone wrong? In 10 years, if I'm losing money on this investment, what caused that loss? And so that's, we kind of list out the risks, right? Like, here are the risks that I'm taking by making this investment. And then 10 years from now, if you own Nortel, and Nortel's trading at $0.70 or whatever, I have no idea what happened to Nortel, so you can, zero, there we go, it's bankrupt, it's gone. Oh, it's gone. Yeah. Someday we'll do the Nortel hour because, boy, I've got stories. I would love to hear it. No doing it without me because I'm interested.

But yeah, so let's say the company is gone. Go back and look at that original investment thesis for making that investment. There's a good chance that if you had a good process and controlled it, that maybe you identified that risk and that's just life happening. Now, if you didn't identify the risk, maybe the pandemic happened. Who could have predicted a pandemic? You probably didn't list that in your risk and that forced a company out of business, for instance, then that's congratulations. That's randomness. That's luck to the downside. You can have luck to the upside. But the important point is separating that randomness from your process. Have the best process possible. Don't penalize yourself for the outcomes, but by the ways with

that you got there. And then if that outcome was completely crazy and outside of the realms of your control, that's randomness. That's luck if you made money. Negative luck, I guess, if you lost money. But either way, you can't do anything about it. I love that. I think almost luck, and I love that you've characterized it as randomness, because as the advisor for Motley Fool options for a decade, we would always get all kinds of, like, you know, help me hedge away the downside. I'm like, well, you realize that, you know, imagine we can make a perfect hedge. A perfect hedge hedges away all volatility, all randomness, all luck, if you will. And it will converge down to the risk-free rate. And at the time, you know, the 10-year bond was trading at 2.5%.

Like, okay, hands up who's excited about a risk-free return, right? When we talk about hedging, we're really talking about getting rid of the downside randomness, the downside volatility, the downside bad luck. But you can't have the upside. I mean, if I told you, sure, I can perfectly protect your portfolio, but it's going to cost you 12% a year. How eager are you to do that? And if you are, call me later on a private line. We'll talk. But you know what I mean?

If I tell you, yes, I can protect the downside on your stock, that may or may not occur. Maybe we're in a nice bull market, and maybe the next uptick for the market or for any particular stock is 20%. But I can absolutely protect your downside using an option strategy. But if it costs you 12% a year, and the long-run average for the market is 10%, 11%, 12% a year, how eager are you to do it? You wouldn't. Well, I hope you wouldn't. Some people would. There's one real good way, I feel, and I've had bad, like, you know, I've had a company where I was convinced the company was playing fast and loose with accounting rules.

Let's put it that way. The company was overvalued, playing fast and loose with accounting rules. Y'all think you know what company it is, but you don't. I promise you. It's not a car maker. and when they were reporting certain metrics that started to look unfavorable for them they just stopped reporting those metrics right problem solved hey yeah this is looking bad for us we'll just stop reporting that metric i was convinced it was a excellent short for valuation

reasons don't ever short on valuation by the way folks but for valuation reasons for governance reasons for management misleading reasons there were so many things that lined up perfectly this was a i might so my process said and i don't short that often but my process said this is a target rich environment you should go after this company and thankfully i didn't because they were acquired at near an all-time high that's why it's not that other company and so clearly and and emily's point have a journal have a journal if you're fortunate enough to be the the face of a foolish investing service your journals right out there in front of everyone for all to see right you want to know what i think about the wreck i made friday it's there and 2700 exquisitely chosen words not really

but like the process repeated over and over and over again should lead to more good outcomes if you've got a good process but sometimes it's going to lead to a to a bad outcome if i if i had shorted based on my analysis i i would have taken it in the teeth on that investment thankfully i didn't but you know but but i very easily could have like i said i don't short a lot but i but i have shorted before or i've used option strategies to short as well but the longer your time horizon is that's that's a built-in inoculation against bad luck no one complains about good luck everyone have complaints about bad luck. If you can really embrace the idea, and I'm not someone that says hold forever. Actually, I think most of the time you shouldn't hold forever. But I think you should

go into an investment buy with the Buffettism ringing in your head. Our favorite holding period is forever. And I think you can have that kind of yin yang going on where my favorite holding period is forever. I've got stocks I've owned that are almost legally allowed to rent a car in the United States. I'll put it that way. Okay. But also all of my stocks are for sale every day. And if you can kind of have that kind of competing thing in your head, I think to Emily's point, if you want to minimize bad luck in your process, because no one complains about the good luck, but if I want to minimize bad luck, those are ways that I can inoculate my portfolio against it, essentially. There's no doubt luck plays a role in investing. However, over the longer term

and across a broader strategy of investing in a number of stocks, in theory, your skills should emerge over the long term. So, you know, have an unlucky year or an unlucky company, hard to have an unlucky decade. And that's what we're trying to go for. And we're trying to point you to the stocks that, you know, can get you there over the long term. If you're a regular Motley Fool Money listener,

you've heard from Emily, Jim, and Nick before. on the show. But when they're not talking stocks with us, they've got a whole other day job looking for high quality companies that can beat the market in the long term. Take Emily Flippen. She's an analyst on our flagship stock picking service, Stock Advisor. If you're interested in more commentary from Emily and other Motley Fool analysts, plus access to Stock Advisor's full stock scorecard and our daily subscriber only live stream, visit www.fool.com slash Emily. I'll also drop a link in the show notes for you. as always people on the program may have interests in the stocks they talk about

and the motley fool may have formal recommendations for or against so don't buy or sell stocks based solely on what you hear i'm mary long thanks for listening from all of us here at motley fool money we wish you a very happy saint patrick's day and of course the best of luck in investing and in life we'll see you tomorrow you